The USA: A nice place to live but I would not want to invest my money there.

A few days ago, I had my quarterly visit to JP Morgan to visit my money. Like many of you, I am unemployed but in my case it is by choice although I shudder to think about what would happen if I wanted to get a real job at the age of 66 . This means that I live from the earning of my investments. I am very fortunate in having enough assets to support a very comfortable life style (so far) . Those that are still employed are concerned about how the financial markets may impact their future such as their ability to pay for the children’s education or to eventually retire. For me the future is now since I do not have a way to make up for losses. This means I have to think about the financial markets both tactically and strategically. I thought I would share with you some of my conclusions with respect to the USA.

I believe the USA will continue to decline for the foreseeable future
The USA will no longer be the leader of the world. This mantel will pass to china sometime in the next ten years because they have a government that works. For those that find this hard to imagine, you need to review they history of various powerful countries. Start by reviewing the decline of the Great Britain which is not so great these days. Great wars often lead to these declines. In the case of Britain, WWII really did them in. In our case, we created wars that so that we could waste our treasure and blood.

Unemployment is systemic and will only get worse

The percentage of Americans that are part of the work force will continue to decline because of unemployment, aging population and stupid immigration policies. Unemployment is systemic and will only get worse. Employers are getting more out of employees because employees are afraid to loose their jobs. Unions are weak and represent an ever declining portion of the work force. Government will be forced to lay off works and the private sector will not employee these people. There is a major skills miss match. Technology is increasing output. Outsourcing will continue and increase. Most new jobs that will be created are low paying service jobs that cannot be outsource. The government reports on number of jobs but not changes in total income. But government tax revenues are greatly effected by the actual income levels. Right now 50% of workers pay no income tax (they do of course pay payroll taxes and may pay state taxes). There is an enormous short fall between government spending and revenue. If we borrow we are just creating problems for tomorrow. If we do not borrow we are just creating problems for today.

The government of the USA is broken.
The system is broken creating two political parties that are more concerned about staying in power than doing what is right for the country. If the the US Government was a business, its stock would be tanking (they dollar is the stock) and if there was a wise board of directors, the management would be replaced. But we do not really have a board. We just have shareholders (citizens) and they do not really know how to get a new management team in place. I can understand the rage of the Tea Party although I do not agree with their solutions. I wish those on the left would show some rage. I thought Obama might be leader like JFK but he turned out not to be up to the task.

US Corporations are doing well
Many are having record profits. This is a result of great productivity, cheap money and global expansion. We have a stupid tax policy which causes multinational companies to move much of their growth off shore. When every one talks about how much money an Apple, Microsoft, Intel have for instance (I speak of the tech companies because I understand their businesses better) they fail to understand that much of that money was made outside of the USA and can not be brought back here without paying very high tax. So while I am happy to own large cap US companies, I do so knowing that much of their business is not in the USA (less than half). Smaller domestic companies can also do well depending on what kind of business they have. They can pay employees less and borrow at low interest rates.

Growth the last ten years was an illusion.
Most growth was in contraction and finance industries. This was all driven on debt. The only way for contraction jobs to come back would be if we had a major program to rebuild our aging infrastructure and a crash plan to reduce our dependency on oil. This will never happen in the political climate we now have.

The various debt reduction plans from both the democrats and the republicans are fantasies
They are based on the assumption that the economy is going to start growing again and this will mean increases in revenue. And instead of getting us out of Afghanistan which is were Bin Laden put us, we want to cut education.

If this is all news to you, I am sorry that I had to be the one to tell you.

6 thoughts on “The USA: A nice place to live but I would not want to invest my money there.”

I agree with you that we have a selfish, dysfunctional group of politicians in Washington. Yet I depart from your view about the decline of the U.S. and the rise of China. I think we have a new paradigm in which the world is getting smaller and that the notion of a dominant power is becoming outmoded. One can hope and pray that as the world becomes smaller that we come to rely on one another more and that the general standard of living rises globally and possibly within the U.S. as well. Our country has had a historic resilience that I believe is unique and will continue even if China is growing rapidly.

Todd, thanks for you thoughtful comment. I wish your view would come true but I don’t think there is my evidence for that. The world is going into a very difficult time. There are not enough resources to support the population. We have a major youth bubble. Frankly, it is not possible for the whole world to see rising standard of living. The only thing that would change that would be some significant breakthrough in energy. I think that will happen in about 30 years.

Avram,
I am completely in agreement. W.r.t. the USA, I suspect that I am more pessimistic than you. All the trends in the major areas are negative.

Above these are 3 meta-issues that stand in the way of turning our country around: NIH, Irrationality, and an antiquated gov’t structure.

NIH (Not invented here). 2 Examples:
1) Average US car gets 23 MPG; Average European 35 MPG. Why? Gasoline taxes in Europe are about $4 more per gallon. We could raise our gas taxes 4 cents every month until we get to $4 (as one part of a carbon tax). The increased tax revenues could be used to fund mass transit, repair our infrastructure, and reduce the payroll tax. More importantly, the higher cost of non-renewable energy would incentivize the private sector in the areas of renewables and conservation. But this is not even discussed. In fact, some politicians were proposing a cut in the Federal gasoline tax.
2) Health Care. On a per capita basis, we pay 2-3X that of all the other developed countries (see OECD data). Yet we have worse outcomes, less doctor visits, etc. For example, to barely get within the top 10 in infant mortality, we would have to cut our infant mortality rate in half. We don’t have to go to single payer, either. Both the Netherlands and Germany don’t have single payer.

Irrationality. Climate change is reality. Evolution is a reality. Yet we have prominent politicians, some running for president, who believe in neither. Science is suspect. If you can’t have a data-driven decision making process, how can there be any hope for turning things around?

Antiquated Government Structure. 1) The structure and rules of the senate facilitate a disproportionate representation of our population; and, 2) The length and funding of our elections facilitate the corruption of our representatives. One consequence is the hollowing out of the middle-class over the last 30 years due to absurd tax and subsidy changes.

I don’t see a path to fix these meta issues. Thus, I have no hope that our gov’t can address our major long-term problems.

The only positive: we have a front-row seat in watching the decline of Western Civilization.
-fred

It seems to me that we are engaged in a grand experiment of more or less unilaterally removing most of our trade barriers while other major trading partners retain more of theirs.

This strategy worked pretty well for the US with Japan, Korea, and Taiwan for decades. But what is different this time is that the population numbers are completely flipped. The US was the large population country, enabling smaller countries to come up towards its standard of living. But now the US is the small population country relative to China, India, Mexico, etc… These other countries are so large relative to the US that while they are growing, they aren’t growing fast enough to offset the downward pressure that they exert on the US economy. We’re reverting to the mean. Our economy is becoming more like a third world economy, with a higher proportion of very rich people, and a lower proportion of middle class.

I remember being at a display conference where the tariffs for displays were up on a map. Roughly Japan 20%, Europe 20%, China 20%, US 5%. Obviously, you’re not going to build your display plant in the US with this kind of world tariff structure. The one counter move left for the US is to devalue the US currency continually to try to offset the disadvantages of the trade barrier imbalance. This is what the US has been trying to do for the last decade. Other countries know this, so some of them (e.g. China) have been trying to stop or slow that devaluation by buying large amounts of dollars, which they then need to find some place to invest, so they exchange them for US treasuries.

Both sides understand this game and know what is going on. The US allows this to go on because we get to consume more goods than we produce. The Chinese allow this to go on because it allows them to keep building their industries by selling lots of stuff to the US.

Unfortunately for both, this policy creates inflation over time. The trick will be whether the US inflation can be kept at 2-4% over real growth, or if it goes out of control.

We also have a defacto policy of allowing large numbers of illegal, low skilled, but highly motivated people to enter the US. These put downward wage pressure on the less skilled Americans for those jobs that have to be done locally in America (like construction, fast food, etc… ) So the less skilled Americans are hit twice: by international competition for goods that can be produced overseas, and locally by illegal immigrants..

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